David Rosenberg is bullish, but worried

David Rosenberg is known for being a glass-half-empty guy when it comes to the U.S. economy and stocks. Now the Federal Reserve’s moves to jump-start the economy have the chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates whistling a happier tune.

“Gluskin Sheff has been increasing its allocation to the U.S. market,” Rosenberg said in a telephone interview late Wednesday. The firm’s favored stocks adhere to a theme of owning shares of cash-rich companies that can not only cover their dividend, but increase it.

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Says Rosenberg: “The key for the U.S. is recognizing that demand for income-generating securities is going to be very strong.”

Rosenberg says the Fed’s leaving interest rates unchanged on Wednesday suggests that the central bank will “stay the course\” with its economic stimulus plan. Moreover, Rosenberg is banking that the next Fed chairman, should Ben Bernanke step down at the end of his term in 2014, will be Janet Yellen, currently the Fed’s vice chairman. Rosenberg describes Yellen as being “more dovish and more pro-quantitative easing” than Bernanke.

“The Fed matters,” Rosenberg says. “The Fed has always mattered.” And nowadays, he adds, “The Fed wants people to take the money out of the mattress and put it to more productive uses across the economy. So long as the economy doesn’t slip into recession and the Fed is accommodative, the trend in the market is usually up.”

But given that Rosie’s outlook doesn’t usually reflect his sunny nickname, the strategist is considering potential risks to his forecast and what would cause the Fed to shift gears – and when.

“I’m spending more time thinking about what the end game might look like,” Rosenberg says.

What concerns Rosenberg most is that the proverbial punch bowl is removed and the party ends sooner than stock and bond investors – and even some Fed members – expect.

The notion that the Fed will maintain its easy-money policy for at least the next few years has become widely accepted and is underpinning financial markets, Rosenberg says. As a foil to that consensus, he cites economist Herb Stein’s maxim that “anything that can’t last forever by definition won’t.”

What could precipitate the beginning of the end? Jobs. Corporate productivity is declining, Rosenberg points out, which prompts businesses to hire workers – and pay more for them. In fact, he adds, the U.S. could soon be minting jobs at a rapid pace and reach – much sooner than expected — the 6.5% unemployment level that the Fed has marked as a threshold for a rate hike.

Rising wages fuel inflation at a time when the Fed policy already is aimed at sparking that flame. The Fed does have a reputation for overstaying its welcome, whether policy makers are easing or tightening, Rosenberg says. But eventually all good things must come to an end, and this cycle will be no different.

Says Rosenberg: “The party ends once the Fed moves to the sidelines.” And the way the economy is going, it could be last call for punch just as many investors are getting started.

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